Gold & Silver Trading Alert: Implications of Miner’s Rally and Gold’s Decline

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Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.

Gold declined once again yesterday, but mining stocks did exactly the opposite. In the previous months the mining stocks‘ weakness indicated lower prices on the horizon – does it signal an important rally at this time?

In our opinion, that’s not likely. Miners had a very good reason to rally in the form of a rising stock market. If the miners‘ strength was something that persisted for many days, we could speak of bullish implications, but it is just a one-day event. Overall, the GDX ETF has declined 1.82% this week while the S&P 500 declined 0.59% - there is clearly no real outperformance of other stocks. Miners are still very close to their 2014 and 2015 lows while gold isn’t – again, no real outperformance, but likely a one-day event. Let’s take a closer look (charts courtesy of http://stockcharts.com).

GDX - Market Vectors Gold Miners - Gold mining stocks

The size of the volume that accompanied yesterday’s upswing was small and miners didn’t invalidate the previous breakdown below the short-term rising support line, which has now turned into resistance.

Based on the amount of questions that we received yesterday, it seems that this rally got many market participants excited, but putting this move into bigger perspective suggests that it was not particularly important. In fact, it didn’t change much, if anything.

If the general stock market continues to rally in the coming days / weeks, then we could see some more relative strength in mining stocks, but it’s likely to be rather insignificant and temporary. It’s not something that seems to be worth trading or something that makes us adjust our positions, especially given what we’re seeing in other charts.

Short-term Gold price chart - Gold spot price

Gold declined on increased volume and closed back below the 50-day moving average. In late August such a breakdown was followed by a quick, corrective upswing, and seeing one would not surprise us here either. However, that’s just a possibility, not a very likely scenario. The decline on increased volume is a bearish phenomenon and a clear sell signal from the Stochastic indicator is bearish as well. The latter indicator doesn’t work exceptionally well for the short term, but it’s more efficient when it comes to detecting sell signals than buy ones.

Gold from the non-USD perspective - GOLD:UDN

Gold seen from the non-USD perspective has just invalidated its previous breakout, which is another bearish sign. Based on the above chart, the outlook for the precious metals market deteriorated yesterday.

Short-term Silver price chart - Silver spot price

Finally, let’s take a look at silver. The white metal declined, just like gold, but silver’s slide was more important and bearish in light of the rally in the main stock indices as silver quite often moves in tune with the stock market. Consequently, silver’s inability to move higher is a quite significant signal.

Summing up, while it seems that the situation became more bullish after yesterday’s session, we don’t think that it did. In fact, we saw some additional bearish signs and all in all we think that no changes in speculative positions are necessary or justified from the risk/reward perspective at this time.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:

Gold: initial target price: $1,050; stop-loss: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
Mining stocks (price levels for the GDX ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54

In case one wants to bet on junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:

GDXJ: initial target price: $16.27; stop-loss: $24.33
JDST: initial target price: $16.98; stop-loss: $3.42

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.

Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.

As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.

The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.

As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.

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